We continue to believe the airlines are focused on capacity discipline and returning capital to shareholders. In our view, airlines have to grow capacity at least in line with GDP growth to generate higher revenues. Airlines had a tough day last Wednesday following Delta Air Lines June traffic release. Traffic was up by 3% on 3.1% more capacity; unit revenue was up 4.5%. The market was disappointed by the unit revenue increase and the comments from Delta Air Lines that international yields showed signs of decline due to capacity increases. The stocks were down 2.3%…

We viewed this as a buying opportunity. We believe the industry is still focused on the right things, and although capacity is increasing, revenues are mostly keeping pace. Delta guided to a 14%-16% June quarter operating margin. Costs are increasing; revenues must increase at least in line with costs.

Stifel’s Joseph DeNardi and Sawyer McKelvey looks at the seasonal performance of airlines including Delta, United Continental and Southwest and find that the group typically lags during the third quarter:

Given the seasonality associated with passenger traffic demand, we look at stock performance seasonality within the industry relative to the S&P 500 – the results surprised us. On average, the strongest quarters for airline relative stock performance were the first and fourth with an average outperformance of 8.5% since 2010. The second quarter outperformed by 6%, on average, while the third quarter underperformed by an average of 4%.

Shares of Delta Airlines have dropped 2% to $37.84 at 10:43 a.m., while United Continental has fallen 1% to $39.50, American Airlines has declined 1.9% to $40.84 and Southwest Airlines has dipped 0.6% to $27.55.

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Earnings reports, corporate strategies and analyst insights are all part of what moves stocks, and they’re all covered by the Stocks to Watch blog. We also look at macro issues, investor sentiments and hidden trends that are affecting the market. Stocks to Watch gives you the full picture of the U.S. stock markets, all day long.

The blog is written by Ben Levisohn, a former stock trader who has covered financial markets for the Wall Street Journal, Bloomberg and BusinessWeek.